Watch designer Movado Group's (NYSE:MOV) stock price was shining as bright as some of the gems on its high-priced watches in mid-March, popping 10% on the back of a favorable fourth-quarter financial update. The positive data points in the report included a solid top-line performance and much better-than-expected profitability.
However, with industry sales growth forecasted to slow down in 2014, the company will likely need to rely on the selling power of its licensed brands, an area where the company seems undermatched against watch giant Fossil Group (NASDAQ:FOSL) and its uber-popular licensing partner Michael Kors (NYSE:CPRI). So, is the company still a good bet at current prices, or should investors look to Fossil and Kors instead?
What's the value?
Movado is one of the watch industry's big players, thanks to an acquisition-heavy operating strategy; the company brought some famous, high-end brands into its portfolio, including Concord and Ebel in 1970 and 2004, respectively. Cognizant of a generational shift by consumers toward less expensive branded watches, the company has also wisely been active in the fashion-watch space, partnering with leading consumer brands, like Coach and Tommy Hilfiger. Consequently, Movado has enjoyed solid top-line growth as well as consistent profitability over the past few years.
In its latest fiscal year, it was more of the same for Movado; it reported a 12.8% top-line gain that was aided by double-digit growth in its domestic and international wholesale channels. The company's merchandise margin was negatively affected by a continued consumer shift toward less expensive products; but it benefited from efficiencies in its purchasing and corporate back-office operations, leading to improved operating profitability during the period. The net result for Movado was stronger operating cash flow, providing the fuel for further product development in the fashion-watch area, like its recent launch of a new watch product line in partnership with automotive icon Ferrari.
Chasing the leader
Of course, Movado has some work ahead of itself if it wants to catch the kingpin of the fashion-watch segment, Fossil Group(NASDAQ:FOSL), which had an estimated 24% of the market in 2012. Like Movado, Fossil has benefited from consumers' gravitation toward fashion watches, 77% of its total sales, which has provided it with the opportunity to market a growing assortment of wares to its customer base, including jewelry, leather goods, and eyewear.
In FY 2013, Fossil continued to build off its multi-year track record of growth, reporting a 14.1% top-line gain that was aided by double-digit sales increases for its watch and jewelry-product categories. Unlike Movado, Fossil manufactures the majority of its products, which allowed it to benefit from precious metal price declines, leading to a slight pickup in its gross margin during the period. The net result for Fossil was solid cash flow generation in FY 2013, thereby funding its store expansion drive around the world.
Naturally, as a fashion-watch manufacturer, Fossil is heavily tied to the success of its licensed brands, especially Michael Kors Holdings(NYSE:CPRI), the venerable fashion design house that accounts for roughly 22% of Fossil's total sales. Fortunately for Fossil, consumers can't seem to get enough of Michael Kors branded products, evidenced by its torrid growth trajectory over the past five years.
In FY 2014, the long-term trend for Michael Kors is holding true as well, with the company's total sales up more than 50%, a data point that bodes well for future sales at Fossil.
The bottom line
Movado looks like a long-term winner in the watch business, thanks to a broad portfolio of products that stretch all the way from high-end statement pieces to fashion watches geared for everyday use. However, after a strong stock price run over the past 12 months, the company seems a little bit risky, with a current, above-market P/E multiple of 21, especially in light of potentially tepid industry growth in 2014.
In addition, Movado's profit growth story rests upon significant operating margin expansion over the next few years, which it may or may not be able to achieve. A better bet would be Fossil; it has a more diversified product mix and is not afraid to embrace potential disrupting technologies, evidenced by a recent partnership with technology titan Google that will be exploring wearable-device concepts.